Opinion
Bankruptcy No. 11-19790-LT7 Adversary No. 13-90063-LT
07-10-2017
In re: CHADWICK C. COLLINS, Debtors. NANCY L. WOLF, TRUSTEE, Plaintiff, v. CHARLES G. COLLINS, JANELLE L. COLLINS, AND CHADWICK C. COLLINS, Defendants.
WRITTEN DECISION - NOT FOR PUBLICATION
MEMORANDUM DECISION (Rent Recovery Timing Issue)
This opinion is intended only to resolve the dispute between these parties and is not intended for publication.
Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. §§101-1532, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. --------
As the Court has previously noted, this case is an example of what happens when an informal family deal is scrutinized through the cold objective lens of laws designed to govern impersonal commercial transactions.
Defendants initially agreed to transfer property between themselves as part of a loving father's attempt to financially help his son move his growing family into a better home; father gave money to be used for a down payment for the new home. Son and his wife agreed to deed an interest in their old home to the father while retaining some interest. Eventually, however, the deal as initially contemplated did not make sense, and they never formally transferred title to father or otherwise completed the original transaction. The consequences of their decision to discard legal formality in favor of an informal arrangement are many.
The Court has already determined that the real property ("Property") was not legally transferred from the Debtor, Chadwick Collins, and his wife, Janelle, to his father Charles Collins. The Court has also already ruled that the Property was held as community property as between Debtor and Janelle. The Court, therefore, ruled that the entire Property was property of the Debtor's bankruptcy estate. Defendant Charles Collins has been ordered to turn the Property over to the Trustee, and the Court is informed that he has done so.
The Trustee also seeks to recover the net rent Charles garnered from the Property during the bankruptcy case. The sole issue addressed in this memorandum decision is the date back to which the Trustee may reach in recovering rent. The parties have identified possible dates: the petition date; the date Charles received notice that the Trustee asserted an interest in the Property; the date the Trustee demanded turnover; the date the Trustee commenced this adversary proceeding; and the date the Court ordered turnover of the Property. For the reasons set forth below, the Court concludes that the petition date is the appropriate choice.
Relevant Background
In 2000, Chadwick and Janelle Collins, husband and wife, purchased a residence at 1480 Beech Tree Road, San Marcos California (the "Property") and took title as Joint Tenants. In 2002, Chadwick and Janelle decided to move into a larger house. In an effort to facilitate the move, Chadwick's father, Charles Collins, agreed to take the Property. In exchange he agreed to assume responsibility for the mortgage thereon and to make a down payment on the new home. The down payment was made in a series of payments.
Charles memorialized the initial agreement in a Purchase Agreement dated August 5, 2002 ("Purchase Agreement'). The Purchase Agreement provided the terms of the transaction including that upon closing, title to the home would be held as "Charles G. Collins & The Collins Family Trust, Join (sic) Tenants With Rights of Survivorship (JTWROS)." The Purchase Agreement also provided "Charles G. Collins has the right to rent, sell, or improve the property without condition or liability to the Collins Family Trust. All loan payments through MLCC, taxes, other assessment, property insurance, and homeowner's fees are to be paid by Charles G. Collins." The parties to the Purchase Agreement were "Buyer: Charles G. Collins" and "Seller: Chadwick & Janelle Collins." The Purchase Agreement was signed by Charles, Chadwick, and Janelle.
In September of 2002, however, Chadwick applied to refinance the mortgage on the Property through Merrill Lynch Credit Corporation ("MLCC"), his employer. Chadwick signed a promissory note dated September 6, 2002 ("2002 Note"). The 2002 Note had a fixed interest rate of 4.875%. The 2002 Note provided that the Deed of Trust securing the 2002 Note:
describes how and under what conditions I may be required to make immediate payment in full of all amounts I owe under this Note. Some of those conditions are described as follows: ... If all or any part of the Property or any Interest in the Property is sold or transferred... without Lender's prior written consent, Lender may require immediate payment in full of all sums secured by this Security Instrument. However, this option shall not be exercised by Lender if such exercise is prohibited be Applicable Law.The 2002 Note was secured by a Deed of Trust recorded October 1, 2002, which named the borrowers as "Chadwick C. Collins, Janelle L. Collins, HUSBAND AND WIFE," ("2002 Deed of Trust").
In late 2002 or early 2003, Chadwick and Janelle vacated the Property, and, shortly thereafter, Charles began to lease the Property to a tenant through a property manager; he continued to do so until recently. Since vacating the Property, neither Chadwick nor Janelle has resided at the Property.
In 2008, Chadwick again refinanced through MLCC. Chadwick submitted a Uniform Residential Loan Application which he executed on May 31, 2008 ("2008 Loan Application"). In the 2008 Loan Application under "Assets and Liabilities," "Schedule of Real Estate Owned," Chadwick listed an ownership interest in the Property with a value of $500,000.00. He designated the Property as "Rental," but did not indicate that it was Charles who was collecting the rent. Chadwick also listed the Archer Road Property. Chadwick signed a promissory note dated May 31, 2008 ("2008 Note"). The 2008 Note had a fixed interest rate of 2.717%. Like the 2002 Note, the 2008 Note provided that the deed of trust securing same would provide:
If all or any part of the Property or any interest in the Property is sold or transferred ... without Lender's prior written consent, Lender may require immediate payment in full of all sums secured by this Security Instrument.This language was directly above Chadwick's signature.
The deed of trust securing the 2008 Note was recorded June 11, 2008, in favor of MLCC and naming as "Borrower," "CHADWICK C COLLINS, A MARRIED MAN, Janelle L Collins" ("2008 Deed of Trust"). The 2008 Deed of Trust provides that Chadwick covenants "that Borrower is lawfully seized of the estate hereby conveyed and has the right to grant and convey the Property and that the Property is unencumbered, except for encumbrances of record." It also provides "If all or any part of the Property or any interest in the Property is sold or transferred..., Lender may require immediate payment in full of all sums secured by this Security Instrument." The 2008 Deed of Trust was executed by Chadwick and Janelle.
The problem for Charles, and the reason the Court is involved, is the fact that, despite the requirement in the written Purchase Agreement that title was to be held by Charles and the Trust as joint tenants, title was never transferred. Neither Chadwick nor Janelle executed a grant deed before Charles took possession of the Property. Chadwick executed a grant deed years later, but Janelle never did, and the ineffective grant deed was never recorded. Likewise, Charles never formally assumed either of the obligations secured by the Property.
Notwithstanding until December 31, 2016, Charles leased out, paid expenses, and collected rents for the Property.
History of This Case
On December 12, 2011, Debtor filed his bankruptcy petition. He did not schedule the Property, nor did he schedule any claims relating to the Property.
On January 6, 2012, the Trustee conducted the initial Meeting of Creditors in the Bankruptcy case.
On February 15, 2012, in response to the Trustee's request at the first Meeting of Creditors, Chadwick's attorney provided the Trustee with copies of: the Purchase Agreement; Schedule E's from Charles' tax returns for 2004 through 2010; and copies of checks showing payment to mortgage holder being made by Charles.
On April 10, 2012, Charles' attorney, Ronald J. Cozad, sent a letter to counsel for the Trustee with a copy to Charles stating he was aware the trustee "may be contemplating asserting a claim against [the Property] in the pending bankruptcy case."
On April 26, 2012, the Trustee's counsel sent a letter to Charles' attorney, Mr. Cozad, asserting that the Property was property of Chadwick's bankruptcy estate and asserting a claim by the Trustee for its recovery.
On May 11, 2012, Charles' attorney, Mr. Cozad sent a letter to counsel for the Trustee disputing the assertion that " 'the [Property] should be liquidated for the benefit of creditors.' "
On June 29, 2012, Charles' counsel, Mr. Cozad sent a letter to counsel for the Trustee stating Charles "is in the process of retaining attorney Susan Stevenson" and "request[ing] forbearance on the complaint for 60 days to allow Ms. Stevenson time to come up to speed."
On March 7, 2013, the Trustee filed a complaint commencing this Adversary Proceeding ("Complaint"). The Trustee sought a declaratory judgment that Charles had no interest in the Property; that the Property was property of the bankruptcy estate; and that the Property was the community property of Chadwick and Janelle. The Trustee also sought an order directing Charles to turn over the Property to the Trustee. Finally, the Trustee sought authority to sell the Property.
On March 11, 2013, the Trustee served the Complaint on Defendants.
After several rounds of summary judgment, the matter went to trial. In a Memorandum Decision entered August 29, 2016, the Court concluded that as of the petition date Chadwick had an ownership interest in the Property; and that as of the petition date Chadwick and Janelle owned the Property as Community Property. The Court, thus, ruled that the Property was property of the estate. The Court concluded, based upon the conduct of the parties from 2002 onward, that Defendants Charles and Chadwick made a conscious decision not to transfer title of the Property to Charles and the Trust in order to enable Charles to take advantage of beneficial financing that was available to Chadwick alone as an employee of the Lender.
On December 2, 1016, the Court ruled that the Complaint was broad enough to include a claim for the postpetition rents. See Dkt. No. 161 & 163.
On December 13, 2016, the Court entered the Order for Turnover, in which it iterated that the Property was property of the bankruptcy estate and held as community property. Dkt. No. 164. The Court also ruled that Charles held no interest in the Property. The Court ruled that the Trustee could use, sell, or lease the Property pursuant to Code § 363. Finally, the Court and ordered the Defendants to turn the Property over to the Trustee. The Court reserved the issue of the Trustee's claim against Charles for monetary damages based upon postpetition rents collected.
The parties have briefed the issue. Dkt. Nos. 176 & 186. Defendants renewed the argument about the scope of the Complaint that the Court had already rejected. Dkt. No. 176. Defendants also argued that the Trustee could not recover any rents which were collected before the Trustee filed the Complaint. Id.
At the most recent status conference the issue of how far back the Trustee could reach was discussed. The parties seem to suggest several possibilities including the petition date; the date Charles received notice that the Trustee asserted an interest in the Property; the date the Trustee demanded turnover; the date Trustee commenced this adversary proceeding; and the date the Court ordered turnover of the Property. The Court ordered the parties to file a joint statement regarding the issues remaining. In keeping with the tenor of this litigation, the parties instead filed their own separate "Joint Statement." See Dkt. Nos. 210 & 211. Both parties indicated that the issue had been fully briefed. The sole issue resolved hereby is the date from which the Trustee is entitled to recover the rents collected by Charles. The amount of the rents and the expenses associated therewith will require an evidentiary hearing or agreement of the parties.
Analysis
The Trustee seeks turnover of the rents under Bankruptcy Code § 542(a) which provides that an "entity, other than a custodian, in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate." (emphasis added).
The Ninth Circuit has ruled that "§ 542(a) allows a turnover motion to be brought against the entity at any time during the pendency of the bankruptcy case, even if the entity no longer possesses or has custody or control over the property, at the time the motion is filed." Shapiro v. Henson,739 F.3d 1198, 1200 (9th Cir. 2014). The only limitation of the language in § 542 is that the property is property of the estate (or exemptible property) and that it not be of inconsequential value to the estate.
If Defendants wish to argue that the rents are of inconsequential value, the Court will consider that at the evidentiary hearing. As noted, the sole issue addressed herein is whether the Trustee's ability to recover the rents is somehow limited to a date other than the petition date.
It appears clear that all of the net rent is property of the estate. The commencement of a bankruptcy case creates an estate comprised of all legal or equitable interests of the debtor in property as of the date of filing. Section 541(a)(1). The scope of § 541 is intended to be broad. United States v. Whiting Pools, Inc., 462 U.S. 198, 205 (1983). The Court has already concluded that the Property is property of the estate as of the date of the petition. Section 541(a)(6) clearly provides that property of the estate includes "[p]roceeds, product, offspring, rents, or profits of or from property of the estate..."
Thus, it is clear from the statutes that the rents are property of the estate and that Charles is required to turn them, or their value over to the Trustee. The Ninth Circuit's ruling in Shapiro clearly indicates that the date of the complaint is not a limitation on the scope of recovery - if it was, a turnover action could never reach property no longer in the possession of the defendant. Nevertheless, Defendants have argued that the Trustee's turnover reach is limited and should be capped at dates other than the petition date. Defendants' arguments appear to be based upon equity and fairness. However, Defendants have provided no authority which would allow the Court to ignore the clear dictates of the statute that the rents are property of the estate under § 541 and completely recoverable under § 542. In response to a similar argument, the court in In re Sann explained:
The plain language of § 542(a) requires Defendants to deliver to the Trustee property of the Debtor that the Trustee can use under § 363. § 542(a); Whiting Pools, 462 U.S. at 204-06, 103 S.Ct. 2309. When the language of a statute is plain, the sole function of the court is to enforce it according to its terms unless the disposition required by the text is absurd. Lamie, 540 U.S. at 534, 124 S.Ct. 1023. Defendants appeal to equity for relief. However, this Court's equitable powers under § 105(a) cannot override specific mandates of the Bankruptcy Code. Law v. Siegel, — U.S. —, 134 S.Ct. 1188, 188 L.Ed.2d 146, (2014); San Rafael Baking Co. v. N. Cal. Bakery Drivers Sec. Fund (In re San Rafael Baking Co.), 219 B.R. 860, 866 (9th Cir. BAP 1998) ("Bankruptcy courts are courts of equity but must follow the law and cannot ignore express statutory commands."). The Court sees nothing in the plain language of § 542(a) which permits a court to grant a transferee relief from liability based upon tracing principles.555 B.R. 721, 744 (Bankr. D. Mont. 2016). In the case at hand, this Court also sees nothing in the plain language of the statute that would limit the Trustee's ability to recover the rents.
Defendants have also argued that Charles was in possession of the Property and entitled to collect rents with the permission of co-owner Janelle. Defendants cite to two cases, Dabney v. Dabney, 104 Cal. App. 4th 379 (2002) and In re Kim, 2016 Bankr.LEXIS 4415 (Bankr.D.Gaum 2016), for the proposition that Janelle's permission precludes the Trustee from recovering the rents. The case, however, involved property held by joint or co-tenants. In California, all contenants have an equal right to possession of the whole property. Dabney, 104 Cal. App. 4th at 382. And to the contrary, both spouses must participate in a transfer of an interest in real property. See Cal. Fam. Code § 1102.
In this case, the Court has ruled that the Property was owned by Janelle and Debtor as community property and, thus, that the entire Property was property of the estate. It follows then that the entire rents are property of the estate and are subject to turnover. Charles had the right to pre-petition rents pursuant to the informal agreement of the parties. But once Chadwick filed bankruptcy, this informal agreement became subject to the requirements of the bankruptcy code; only the Trustee in concert with Janelle, could agree to Charles' continued recovery of rents; and the Trustee did not do so.
For these reasons the Court holds that the Trustee may recover the net rents collected by Charles back to the date of the petition. A determination of the amount of those rents and the availability of any offsets will require another evidentiary hearing if the parties are unable to agree to an amount. DATED: July 10, 2017
/s/_________
LAURA S. TAYLOR, Chief Judge
United States Bankruptcy Court
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF CALIFORNIA 325 West "F" Street, San Diego, California 92101-6991 In re: CHADWICKC. COLLINS, CASE NO.: 11-19790-LT7 NANCY L. WOLF, TRUSTEE v. CHARLES G. COLLINS, JANELLE L. COLLINS, AND CHADWICK C. COLLINS, ADV. NO.: 13-90063-LT
CERTIFICATE OF MAILING
The undersigned, a regularly appointed and qualified employee in the office of the United States Bankruptcy Court for the Southern District of California, at San Diego, hereby certifies that a true copy of the attached document, to wit:
MEMORANDUM DECISION (Rent Recovery Timing Issue)
was enclosed in a sealed envelope bearing the lawful frank of the bankruptcy judges and mailed via first class mail to the party at their respective address listed below: Nancy L. Wolf, Trustee
P.O. Box 420448
San Diego, CA 92142 Kevin J. Hoyt, Esq.
Estes & Hoyt, A.P.C.
550 West C Street, Suite 530
San Diego, CA 92101 Jennifer E. Duty, Esq.
Gordon Rees LLP
101 West Broadway, Ste 2000
San Diego, CA 92101 Susan C. Stevenson, Esq.
PYLE SIMS DUNCAN & STEVENSON
A Professional Corporation
401 B Street, Suite 1500
San Diego, CA 92101
Said envelope(s) containing such document was deposited by me in the City of San Diego, in said District on July 10, 2017.
/s/ Regina S. Fabre
Regina A. Fabre, Judicial Assistant